Hi, I'm Professor Navarro here. In this first lecture I will try to illustrate just how important microeconomics can be in both your personal and professional lives. And also give you a sample of some of the more important concepts in economics like opportunity costs and market failure. Perhaps most importantly I will lay out a road map of the major areas of microeconomics that you will be studying. The goal here is to help you see the forest before we start looking closely at each of the trees. [MUSIC] >> At a business and professional level, microeconomics can help answer questions like, how can my firm minimize its costs and increase its profits? What prices should I charge for my products? Should I invest in new plant and equipment? And how should I respond to an aggressive strategic move by one of my competitors? At a personal level, microeconomics is equally practical. It can help answer questions like how can I maximize my grade point average given my time constraints? Will I really be better off financially if I quit my job now and go back for an MBA degree? What kind of career should I be preparing myself for? And what about that new refrigerator or automobile I want to buy? Should I get the new energy-efficient one with a higher price tag or settle for a cheaper model? Most broadly, microeconomics can also help you come to understand why the government is so involved in our economic lives. It can do so by answering questions like, why does the government regulate prices in some industries like electricity and gas but not in others? Why are there laws requiring seat belts and motorcycle helmets? Why do we have a federal environmental protection agency and thousands of rules about workplace safety? And why does the government provide some goods, like our national defense and lighthouses, and let the free market provide other goods, like hot dogs and computers? Microeconomics can help answer questions like these because it arms us with a very powerful set of conceptual and problem-solving tools. As you study this challenging subject many ideas and words that may be quite foreign to you now like, opportunity cost, the time value of money price elasticities And oligopoly will become your friends for life. Let me show you how powerful and helpful these friends can be, by telling you several stories about some fictional people in very real situations. Let's start close to home with that refrigerator problem. Priscilla Sanchez wants to buy a new one and her choice's between a very energy-efficient model that cost $750 or the identical refrigerator without the energy saving features for only $500. Since Priscilla just finished her course of microeconomics, she knows about the time value of money. So, after calculating the net present value of the energy savings on an electricity bill over the life of the investment, she realizes that the seemingly more expensive refrigerator is actually much cheaper. In fact, Priscilla helped her husband Phil come to a similar conclusion on a completely different topic. Phil was thinking about entering an executive MBA program, but the tuition is very expensive, over $100,000 for the two-year program. Phil's problem in thinking through his decision was that he didn't know how to compare his up front cost of going to school with the future benefits that would come in the form of a higher salary and better promotional opportunities. >> So Priscilla once again got out her hand calculator and made some assumptions about Phil's future stream of income after he got his MBA. And it became pretty clear to both of them that the family would be better off financially over the long run with Phil in school now. And that's where Phil is. He sits right next to Stuart Applegate in his Microeconomics class. Before losing his job and going back to school, Stuart was the chief executive officer of a high-flying computer software company. However, when his company started to lose money, Stuart's solution was to raise prices in the hopes of boosting revenues and profits. Unfortunately, Stuart came from an engineering background, and as he hadn't studied microeconomics, Stuart didn't understand that the demand for his company's product was what economists call highly elastic. In such a case, raising prices actually reduces both total revenue and profits. The result was that Stuart's pricing strategy bankrupted the company. Forunately, Jean Twilley was a lot smarter when confronted with a similar situation in her job as a financial analyst in the operations department for the transit authority in Paradise California. Facing a revenue shortfall, Jean ordered an analysis of the elasticity of demand for bus services. When she found that bus demand was also highly elastic, she recommended to her supervisor that the transit authority lower bus fares. This pricing strategy did indeed increase ridership and boost total revenues. It also earned Jean a nice promotion. It was a totally different set of microeconomic tools that helped Jong Chan get a different kind of promotion - one into medical school. Jong's problem was that at the end of his freshman year in college, his grade point average was only 2.9. However after taking a course in microecononics Jong used the concept of opportunity costs and the tool of the possibilities frontier to more efficiently allocate his studying time across various subjects. The result? By the end of his senior year Jong had raised his grade point average to 3.8. It's too bad that Jong's father, Nai-fu, didn't receive the same training in microeconomics as his son. Which isn't to say that Nai-fu Chan isn't a success himself. After all, he's a newly elected member of Congress from the Los Angeles area. However, in his first term last year, Congressman Chan tries to pass some legislation that would have forever eliminated any kind of price regulation in the entire transportation industry. While such price deregulation makes a lot of sense in an industry like trucking which is highly competitive, it makes very little sense for the railroad industry, which is in essence a natural monopoly that will gouge consumers with high prices in the absence of government regulations. Fortunately, Congressman Chan's bill didn't pass. Of course I can go on and on with these kind of stories. But I think you already get the point. When you learn microeconmics, you will learn a skill that will help you enormously in both your personal and professional life.
